Trading liquidity for security


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It’s no secret that in the cryptocurrency community security should always be at the forefront of your mind. Exchanges are hacked from time to time, scammers are abound, and the only thing between you and losing all of your precious crypto is custody of your private keys.

For those new to the world of financial sovereignty, this can be a little overwhelming at first. Any crypto enthusiast worth their salt, makes one of their first investments into the crypto space in a hardware wallet. (Personally, I have both a trezor and a ledger nano S hardware wallet, but I definitely prefer the trezor and use it over the ledger whenever possible) This is sound advice, as maintaining control over your private keys is the key to keeping your money safe. By storing your cryptocurrencies in a hardware wallet (also known as cold storage) you are eliminating the potential for a would be hacker to gain access to your device and pilfer your keys. This is because cold storage means storing cryptocurrency in any capacity that is disconnected from the internet. Hardware wallets aren’t the only cold storage solution, as you can also generate paper keys (essentially a written or typed copy of your private key) or store private keys on a computer or hard drive that is disconnecting from an internet enabled device.

One thing is for sure, while cold storage may be the safest way to store your crypto, it definitely has it’s drawbacks. It can be a little bit nerve wracking to store thousands of dollars on a key chain. You may worry more about the physical solution than you do about an actual online storage solution like an exchange wallet. Things like floods, fires, robberies, and general absentmindedness could all potentially claim your crypto from you at a moments notice. Ink on paper can evaporate over time and there’s really no way to know that hardware wallets will ALWAYS work like they’re supposed to. You also run into the issues of vulnerability vectors by creating backups of your private keys and storing them in multiple locations, while having your private keys stored in 2 or 3 places instead of just one might prevent loss in the event of a disaster, it also presents another opportunity for that money to be accessed without your knowledge. Something to consider. Personally, the idea of storing my private keys (either paper or plastic) in a safe deposit box managed by a brick and mortar bank gives me a cold shudder.

I really think the best solution lies in a mixture of everything. Diversify your holdings across multiple security platforms. Provided you plan on continuing to grow them and provided that you are in the game for the long hodl, it really makes sense to take advantage of multiple ways of keeping your crypto safe. Trezor and Ledgers are great, but what happens if something goes wrong with the software and you can’t access your crypto for a long time…or maybe forever? Worst case scenario, I know, but the potential is there. This is why distributing your crypto across several storage methods is a good idea, to protect yourself from losing everything in one fatal flaw.

An example would be storing 1 btc in a paper wallet (keep one copy in your personal safe and one copy buried in a mason jar on a deserted island) and storing 1 btc in your trezor. However, there is an important thing to consider here, that is the amount of liquidity that we trade off for the security we gain from cold storage.

Doing a private key recovery from a paper wallet isn’t exactly difficult, but it’s not exactly the most intuitive, fast paced thing, and user friendly thing in the world either, at least not yet anyways. And while I love using my trezor, it does take a little time for me to navigate to the website, punch in my pin code, wait for my wallet to load up and then navigate to the correct currency and conduct my transaction.

It is important to consider these trade offs in liquidity that come with security benefits. What I mean when I say that is that if you plan to buy bitcoin and sell it if it drops below a certain price, you could very easily see an additional 10% swing following your stop loss, long before you even get the bitcoin transferred onto your exchange of choice. Now for someone like myself who chooses to hold for the long term and I keep 99% of my crypto in cold storage, this is really a non issue…but for anyone else who might be involved in day trading or swing trading, it might not be a bad idea to consider keeping smaller portions of crypto on exchanges, or maybe even moving it back and forth between warm wallets on your personal computer and the exchange wallets.

Provided that you practice good cybersecurity habits, your computer is a relatively more safe place to store your private keys than an exchange, for the simple reason of the size of the target painted on your backs. Who is a would be crypto thief more likely to target? Random everyday desktop computers they scour for crypto, or an exchange laden with every coin imaginable? This is what’s called a honey pot.

In my opinion, a thoughtful mix of cold storage solutions for the long term, warm/hot wallets for the mid term/short term on your computer, and exchange storage for only extremely necessary liquidity or short time periods is ideal. It is also interesting to consider, that in a world of growing connectivity by cryptocurrency, there may come a day when making a purchase with bitcoin is an as common as making a purchase with cash. Take it from me, if you’ve never experienced how easy and painless it is to send someone crypto in exchange for something, definitely try it out, it’s a blast. It may be reasonable to start thinking about portable warm/hot wallets like on your cell phone the way you think about cash that you pull out an ATM. It would be silly to carry around $5,000 in cash in your wallet, just as it would be silly to carry around $5,000 in bitcoin stored in your cell phone.

Manage your cryptocurrency carefully, and take steps to ensure that you are being the best custodian possible for your funds. There are no do overs around here.